May 29, 2010
By Laura du Preez
Financial planners and product providers will have to do far more to ensure they are acting in your best interests as policy and other changes in the post-recession environment take effect, the annual conference of the Financial Planning Institute (FPI) heard this week.
And recent laws and regulations that provide you with greater protection are not the only ones that are likely to be put into place.
As a consumer of financial services products and a client of a financial adviser, you should expect the the changes to have a direct bearing on some of your dealings with advisers and companies.
The FPI is a professional organisation that represents financial planners. Planners who have completed the required postgraduate course may hold the accreditation of Certified Financial Planner with the FPI.
Ahmed Jooma, a chief director in the financial sector policy unit at the National Treasury, warned FPI members at the conference that if they want to be part of a self- regulated profession, they must demonstrate that they appropriately sanction members who do not abide by their code of conduct.
And to protect yourself as a client, Jooma says, you must perform a due diligence on your financial adviser and ensure that he or she is properly qualified, as well as being fit and proper to advise you.
Although the government has a lot of good regulatory policy in place in the financial sector, there is a need for strong and ethical leadership in financial services companies and among intermediaries, he says.
Jooma says the government is looking to extend and consolidate consumer protection measures.
"The Constitution has rights for everything but consumer protection. We have to make good."
The Consumer Protection Act will come into force shortly, but the National Treasury is aware that consumer protection in financial services is fragmented, and responsibility for various measures falls under a number of different government departments and/or regulatory agencies.
The treasury's Directorate on Consumer Protection and Market Conduct is developing a policy document on consumer protection in the financial services sector, he says. In addition, it is co-ordinating a process to develop a national policy on consumer financial education.
Consumer education
Jooma says educating yourself is your first line of defence, and to assist you the treasury and the Financial Services Board (FSB) are looking to develop a consumer education policy that empowers you, as a consumer of financial services, to ask the right questions.
The treasury is also at an advanced stage of completing its work relating to recommendations coming out of the Competition Commission enquiry into banking charges, Jooma says.
The National Treasury is watching developments in Britain, where the government is considering a ban on commissions earned on financial products. Jooma says he is unsure whether or not South Africa should slavishly follow the British example, but a debate on this will begin in earnest.
The government is still working on its retirement reform plans, Jooma says, but is faced with a number of problems and "a fiscal space that is extremely constrained".
In order for retirement reform to work, the government needs to extend retirement fund membership to the labour force not covered by it in an environment of significant permanent unemployment.
Jooma says about 7.3 million people were unemployed before the recession and another one million have lost their jobs since the recession began. Therefore job creation is a major priority, and he urged financial intermediaries to contribute by employing young graduates.
Another problem is the high mortality rate among South Africans - many people do not reach retirement age and have a greater need for financial protection against dying before retirement, Jooma says.
Low incomes among a high proportion of the working population are also a problem. In 2007, he says, 77 percent of the working population in both the formal and informal sectors was earning less than R11 000 a year, while the social old-age grant is now more than R12 000 a year.
Jooma says two other issues the National Treasury's financial policy division are looking at is bad governance of retirement funds and whether or not there is a need for professional trustees to serve on retirement fund boards.
The treasury is concerned that putting highly educated professional trustees onto boards of trustees will not ensure that the boards are honest. "Education does not necessarily translate into honesty," Jooma says.
He says there are about 11 000 registered retirement funds, which put considerable strain on the FSB's ability to regulate. Consolidation is necessary, and rather than compelling funds to consolidate, the government will look for ways to bring about voluntary consolidation.
Another issue the treasury is looking at, Jooma says, concerns the one-size-fits-all approach to the application of anti-money laundering legislation. The focus has to be on preventing large amounts of money being laundered and not on the origins of R50 or R100 that may have been saved under a mattress.
Jooma says as the National Treasury's counterparts in Britain have realised, a number of problems in the financial services industry arise as a result of the structure of the products that providers create.
Britain has introduced a Treating Customers Fairly (TCF) methodology, and the FSB, supported by the treasury, plans to follow suit.
Jooma says the treasury does not want every financial product to be submitted to the FSB for approval before it is marketed to you but hopes that the TCF approach will encourage product providers to be more sensitive to your expectations of a product.
He appealed to FPI members to put forward ideas on how to get around various policy problems in the financial services sector.
Incentive packages that lead to poor advice under fire
Financial service companies that entice financial advisers with large sign-up incentive packages worth hundreds of thousands of rands, but with stiff sales targets attached, are in the firing line of the FSB.
Wendy Hattingh, the head of the Financial Advisory and Intermediary Services (FAIS) Act supervision department at FSB, told the Financial Planning Institute conference that the practice leads to your being sold or switched into products that are not necessarily in your best interests.
Hattingh says the FSB is investigating larger companies that incentivise people to become their tied agents and then set targets on how many products the tied agents are expected to sell. If the agents fail to meet these targets, they are fired.
In attempting to reach the targets, the tied agents are unlikely to act in your best interests and give you quality advice. They are likely to move your investments or life policies from one product provider to the one they have just joined.
She says the FSB hopes the notice on conflicts of interest will stop this practice by large financial services companies, but the FSB will keep watch and, if necessary, will revise the code of conduct again.
Hattingh warns that should incentives to sell regardless of your interests continue, the perpetrators are likely to end up before the FSB's enforcement committee, where they may be fined and/or ordered to pay compensation to people who received inappropriate advice.
The FSB's notice amends the code of conduct for Financial Services Providers under the FAIS Act. Although the FAIS Act and the code already stipulate that advisers should avoid conflicts of interest, the amendments to the code spell out how financial services companies and advisers should deal with actual and potential conflicts of interest.
A conflict of interest is defined as a situation in which a financial services provider or one of its representatives has an actual or potential interest that may influence his or her advice to you, prevent him or her from rendering an unbiased and fair financial service to you or prevent him or her from acting in your best interests.
As of July 20 this year do not be surprised if your financial adviser starts to tell you what he or she earns from various product providers.
The amended code of conduct by which your financial adviser must abide makes it compulsory for him or her to disclose to you any conflicts or potential conflicts of interest that may prevent him or her from providing you with the best advice. This means that if a product provider gives your adviser a free trip overseas or to a game lodge, or a free gift, such as computer software, or any other valuable consideration, your adviser will have to declare such gifts to you. You can then consider whether or not you are being steered into a particular product because of these incentives.
R1 000 limit on gifts
Furthermore, from October this year, the giving and receiving of a financial interest that amounts to more than R1 000 for the year will be prohibited.
A financial interest is defined as any cash, cash equivalent, voucher, gift, service advantage, benefit, discount, domestic or foreign travel, hospitality, accommodation, sponsorship or other interest, except an ownership interest or training on products, legal matters related to products or technological systems required to sell that product. This training must be available to all providers or representatives.
Finally, the code of conduct states that by April next year all financial services providers have to develop a policy that states how they will deal with conflicts of interest and how they will avoid them.
Hattingh says the changes to the code mean that advisers who have been given free tickets and/or trips to the forthcoming soccer World Cup will probably find that these are the last trips they enjoy from a provider.
Advisers who are doing their jobs ethically and 100 percent in terms of the FAIS Act will not be affected by the amendments to the code, Hattingh says.
  
 
|
